Technology

Apple Closes In on Hollywood

Steve Jobs is negotiating with the big studios to offer more movies for sale and rental on iTunes, but both sides will have to give a little

It has been Hollywood's worst-kept secret: Steve Jobs is starting to win over the film industry.

The Apple (AAPL) CEO who all but invented the digital music marketplace with the iPod and iTunes has found the going far more difficult in the video market. The Apple TV set-top box launched last year has been a dud, and the limited selection of movies on iTunes has prevented film downloads from becoming another smash hit like music.

But the buzz is heavy that Jobs and most of the big studios are nearing compromise on key sticking points that have prevented iTunes from offering most of the new and old movie titles consumers see at Blockbuster (BBI), Netflix (NFLX), and Wal-Mart Stores (WMT). Studio executives, forced into silence by Apple's ultra-uptight nondisclosure agreements, aren't talking, and neither is Apple.

Possible Pricing and Timing Concessions

BusinessWeek has learned that Apple is close to nailing down agreements with most of the big studios, though not all may be ready to announce by the time Jobs takes the stage on Jan. 15 at the annual Macworld Conference & Expo in San Francisco.

The betting is that Jobs, who previously balked at paying the studios more than $14 for each movie sold through iTunes, has agreed to pay closer to the $17 wholesale price Hollywood gets from "physical" DVD sales by Wal-Mart and other retailers. Some of the studios, meanwhile, appear to be backing down from their refusal to allow online downloads of new movies until a month or so after DVDs of those films arrive at stores.

A breakthrough with the movie studios could provide a badly needed boost for Apple TV, which has been roundly criticized for shortcomings beyond iTunes' limited film selection. The device, which streams video and music on a home computer's hard drive to a TV or home theater, suffers from poor audio and visual quality compared with rival products. Apple TV doesn't play video from many sites other than YouTube. The device isn't even integrated closely enough with iTunes to enable users to browse and download video content directly from a TV instead of using a computer first. The next iteration of Apple TV is expected to address a number of these shortcomings, but a wider selection of films on iTunes would certainly help. At last count, Apple had sold just 2 million movies on iTunes, compared with 100 million TV shows and more than 1 billion songs.

For Sale and For Rent

The Financial Times reported on Dec. 26 that Apple has already signed an agreement with at least one studio, Twentieth Century Fox (NWS), to offer rental downloads of its movies. Now sources tell BusinessWeek Apple is nearing deals with Warner Bros. (TWX), Paramount Pictures (VIA), and Lionsgate (LGF) to allow movie sales, rentals, or both through iTunes.

To jump-start his video business, Jobs needs studios to supply newly released films for both "sell-through" to consumers and rental. Currently, iTunes sells recently released movies from Disney (DIS) for $14.99 and older titles from studios such as Lionsgate for $9.99. Sources say Apple plans to charge $3.99 a pop for 24-hour rentals. Since Apple may agree to pay closer to the $17 wholesale price paid by other retailers, it's unclear whether iTunes might boost the price or take a small loss to help drive sales of Apple TV boxes and video iPod players.

Sources say Warner Bros. and Paramount are mulling agreements that would allow both sales and rentals. Fox has already agreed to offer both, but only the rental deal is set to be announced Jan. 15; the two sides are working out final details on the sales arrangement. Lionsgate, meanwhile, is considering a deal to let Apple also offer its films for rental. Even Sony (SNE), a longtime Apple rival in consumer electronics, is said to be contemplating a deal to sell its movies through iTunes. Among the major studios, only Universal, whose parent company NBC (GE) has yanked its TV shows from iTunes over a pricing dispute, is not discussing a movie deal with Apple, according to sources.

Coming to Terms

Getting the studios to give Apple their movies for online rentals has been tricky. Jobs wants new movies available for download "day and date" with DVD releases so that iPod users can rent them the same day the DVDs become available at Blockbuster, Wal-Mart, and other rental venues. Studios generally won't make their latest releases available for rent electronically—mostly through video-on-demand services on cable systems—until about 30 days after the DVDs hit store shelves.

Fox appears to have backed down from that 30-day requirement, but other studios are still studying the issue. Warner Bros. is said to be contemplating Apple's demand. The studio already allows some movies to be offered day and date with DVD release through Microsoft's (MSFT) Xbox video service. But Disney, of which Jobs is the biggest single shareholder and which is the only studio to allow new movies to be sold through iTunes, is said to have balked at allowing day and date rentals of its movies.

The biggest challenge for Jobs may be whether, and when, he might be able to get all the studios to back common terms on pricing. Industry and marketing experts cite Apple's ability to communicate a simple 99¢-per-song pricing model as key to iTunes' success. But despite Jobs' love of simplicity and big theatrical flourishes, sources suggest he may need to be content with a trickle of movie studio deals over the first half of 2008. Compared with those cats in the music industry, it seems the felines in Hollywood are a lot harder to herd.